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Exchange Rates - S

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25 views10 pages

Exchange Rates - S

Uploaded by

technabooks
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Exchange Rates

Exchange Rates
The exchange rate is the purchasing power of a currency in
terms of what it can buy of other currencies .
Exchange rate system

Fixed Exchange rate Flexible/Floating exchange rate


Fixed System
A fixed system is when a government sets their currency against
another, and that exchange rate does not change. The country
can decide to devalue its currency overnight to improve
international competitiveness of its industry.

One example was the gold standard, where each major trading
country made its currency convertible into gold at a fixed rate.
Today, no country uses the gold standard.
Free Floating System
A free-floating system is where the value of the currency is
determined purely by interaction of market demand and
supply of the currency, and thus are affected by changes in
demand and supply, with no target set by the government and
no official intervention in the currency markets.

Both trade flows and capital flows affect the exchange rate
under a floating system. Most systems are floating, including the
UK.
Exchange rate system
Flexible/Floating exchange rate
Fixed Exchange rate
• Determined by Market forces of Demand & Supply
• Value is Fixed and maintained by the government Price of a currency is decided like any other commodity.
How does govt. Maintains the value?- Later Price of currency S of currency
(Exchange Rate)
E
• Value is Fixed and maintained by the government
P
How does govt. Maintains the value?
• Value is maintained by either SELLING /BUYING
the currency . D of currency
 If there is a Downward pressure (falling Quantity (Currency
Q
value) on the value of currency from market
• What creates demand for domestic currency?-
forces- • Exports, Investments by Foreigners in country’s shares or FDI
 Ask Cen Bk to BUY. (eg. Land for setting up branches ), To open account in
Demand > Price country’s bank (when roi is higher in home country)
 If there is a Upward pressure (rising value) • What creates Supply for domestic currency?-
on the value of currency from market forces- • opposite of above
Ask Cen Bk to SELL.
Supply > Price
Free Floating System
The exchange rate is determined at the point where
the demand curve and supply curve for sterling on the
foreign exchange market meet.
Mid Plenary: When does value of currency falls
(Depreciates)?

Extended Task: Do the same exercise


for currency appreciation.

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